Ackman Like Buffett Buoyed by Fracking in Bakken: Freight

Bill Ackman’s Pershing Square Capital Management LP, which bought most of its shares in late 2011 as the stock rebounded from a two-year low, stands to benefit as CP expands operations in the Bakken. Photographer: Norm Betts/Bloomberg

June 29 (Bloomberg) -- Bill Ackman, the largest investor in
Canadian Pacific Railway Ltd., is following Warren Buffett in
profiting from growing oil and gas production in North America’s
Bakken shale.

Ackman’s Pershing Square Capital Management LP, which
bought most of its shares in late 2011 as the stock rebounded
from a two-year low, stands to benefit as CP expands operations
in the Bakken.

The railway is one of only two with tracks in the North
Dakota part of the region, which also includes Montana and the
Canadian provinces of Saskatchewan and Manitoba. Buffett’s
Berkshire Hathaway Inc. spent $26.5 billion in 2010 to take over
Burlington Northern Santa Fe LLC, the other railway with lines
running directly into the Bakken.

“Ackman was smart,” said Tony Hatch, an independent rail
analyst in New York. “When he bought his shares he knew that an
aggressive management could take advantage of opportunities in
the Bakken shale.”

Canadian Pacific shares have gained 26 percent in the past
12 months in Toronto trading, compared with a 13 percent gain
for domestic rival Canadian National Railway Co., and a 3.3
percent gain for the S&P 500 Railroads Index, which tracks the
three largest U.S. railroads by market capitalization.

Ackman is bolstered by his success in forcing new
management at what was North America’s least efficient railroad.
Ackman cited access to the Bakken region among potential
advantages for the company in a proxy fight he led that pushed
out Chief Executive Officer Fred Green in May. CP today named
Hunter Harrison, the former chief executive of CN, as president
and CEO.

Hauling Sand

CP announced an agreement June 22 with U.S. Silica, the
second largest U.S. producer of sand for hydraulic fracturing --
known as fracking -- to bring sand from a facility in Sparta,
Wisconsin to the Bakken.

While Tracy Robinson, Canadian Pacific’s vice president of
energy and marketing and U.S. Silica spokeswoman Anita Willis
declined to comment on the volume involved, Fadi Chamoun, an
analyst at Bank of Montreal, said the railway told him the deal
will see CP ship 1 million metric tons of sand a year starting
in 2013.

Bakken output grew with the arrival of fracking, which
releases oil and natural gas trapped beneath shale rock by
blasting it with a mixture of specialized sand, chemicals and
water. CP has benefited not only by shipping raw materials to
service the growing number of drills in the area, but also by
exploiting a lack of pipeline capacity to bring oil out of the
largest contiguous oil deposit in the continental U.S.

‘Growth Engine’

In 2009 CP was running 500 railcars of crude oil out of
North Dakota. By 2011 that number reached 13,000, and by 2014
the Calgary-based company predicts it will be carrying 70,000
carloads of crude out of the Bakken.

Energy shipments are driving the company’s expansion and
the Bakken is “the key growth engine of our energy portfolio,”
Canadian Pacific’s Robinson said by telephone from Calgary.

Drilling in the region has created demand for materials
such as pipes, tubing, cement and the lumber needed to build new
worker camps. Each drill requires roughly 23 railcars of inbound
materials, according to data compiled by Bloomberg.

The number of producing oil wells in the Bakken reached
3,794 in the second quarter of 2012, data compiled by Bloomberg
show, compared with 1,083 three years earlier. At a conference
in Toronto in November, CP’s chief financial officer Kathryn B.
McQuade said the company estimates the Bakken will see 1,800 new
wells annually for the next 10 to 20 years.

Carrying Crude

Railways carried 23 percent of Bakken crude to refineries
in November, up from 18 percent the month before. Pipelines
accounted for 62 percent of shipments in November, while trucks
carried 5 percent and 10 percent was processed by a local
refinery in North Dakota, according to data compiled by the
North Dakota Pipeline Commission.

“They’re going to bring rolling pipelines, we call them,
to bring unit trains of oil out,” said Hatch. The crude is
shipped to refineries in Oklahoma, California, Louisiana, New
Mexico and Texas, according to data compiled by Bloomberg.

Having access to the region means CP doesn’t have to share
its shipments, or revenue, with other railways. The ability to
haul in both directions bodes well for CP’s bottom line, said
John Anderson, advisory director at Greenbriar Equity Group LLC
in Rye, New York.

“If you have the access to the supply as well as the
destination you have a 100 percent advantage over your
competitor,” Anderson said. “It translates into maximum
allowable profits.”

Efficiency Potential

While Canadian Pacific declined to say how much of its
business comes from the Bakken, Chamoun at Bank of Montreal said
the energy play will boost revenue by C$400 million annually. He
forecasts C$5.6 billion total revenue for CP in 2012.

“The C$400 million opportunity is in the cards in the next
two to three years, and that’s meaningful growth,” Chamoun said
by telephone from Toronto. He said that while CP’s exposure to
Bakken is not by itself a reason to buy the stock, the company
can increase profits by operating more efficiently. Chamoun has
a market perform rating on the company and a target price of
C$81. CP rose 1.6 percent to C$74.72 in Toronto today.

Montreal-based Canadian National also ships sand destined
for the Bakken from Wisconsin after it bought Wisconsin Central
Transportation Corp. in 2001. Still, without tracks running into
North Dakota, it must either transfer its loads to BNSF for the
final part of the trip, or have them trucked from Saskatchewan,
CN spokesman Mark Hallman said by phone from Toronto.

CP is working with partners such as U.S. Silica to build
facilities along CP’s system, Robinson said, creating more
direct lines between producers and customers.

Single Provider

“These guys need to get these products to the wellhead in
a timely, reliable, consistent, cost-effective manner,” she
said. “Being a single line provider we can control the supply
chain.”

Until more pipeline capacity comes online, rail will be
needed to ship crude out of the formation. BNSF is predicting
growth in the Bakken for the next five years, according to Denis
Smith, the company’s vice president for industrial product
markets. Bakken drilling operations are coming online faster
than the pipelines needed to serve them, said Smith, creating an
opportunity for railways that can start shipping much faster.

“Most of these guys get up and running in about a year
while everyone sits around for the permitting of pipelines,”
Smith said by telephone from Fort Worth, Texas.

Drilling in the Bakken formation, a 360-million-year-old
shale bed two miles underground that geologists believe holds a
15,000 square-mile region of oil in North Dakota alone, helped
that state record the fastest growth in personal income, jobs
and home prices, according to Bloomberg Economic Evaluation of
States, or BEES, index data.

Anderson at Greenbriar said Ackman may have built his
position in CP at “the perfect time.”

“He probably was in before the value of the Bakken was
reflected in the public stock price,” he said. “That’s a
terrific way to make money.”